NOTE 10. INCOME TAXES
Income Tax Expense or Benefit
The following table presents the components of our provision for income taxes for the years ended December 31, 2016, and 2015, in thousands:
|
| | | | | |
| | | |
| Years Ended December 31, |
| 2016 | | 2015 |
Current | | | |
Foreign | 22 |
| | — |
|
Deferred | | | |
Federal | 724 |
| | — |
|
Income tax provision as reported | 746 |
| | — |
|
The following table presents a reconciliation between the income tax benefit computed by applying the federal statutory rate and our actual income tax benefit:
|
| | | | | |
| | | |
| Years Ended December 31, |
| 2016 | | 2015 |
Income tax benefit at federal statutory rate | (10,517 | ) | | (10,692 | ) |
State taxes, net of federal benefit | 462 |
| | (364 | ) |
Change in deferred tax asset valuation allowance | 8,772 |
| | 12,301 |
|
Tax effects of: | | | |
Losses and rates in foreign jurisdictions | 222 |
| | (1,595 | ) |
Other permanent items | 1,807 |
| | 350 |
|
Income tax provision as reported | 746 |
| | — |
|
The following table presents loss before income tax attributable to domestic and to foreign operations (in thousands):
|
| | | | | | | |
| | | |
| Year Ended December 31, |
| 2016 | | 2015 |
Domestic | $ | (29,503 | ) | | $ | (39,723 | ) |
Foreign | (1,430 | ) | | 8,276 |
|
Loss before income taxes | $ | (30,933 | ) | | $ | (31,447 | ) |
| | | |
Deferred Tax Assets and Liabilities
We record deferred tax assets and liabilities to account for the effects of temporary differences between the tax basis of an asset or liability and its amount as reported in our consolidated balance sheets. The temporary differences result in taxable or deductible amounts in future years.
The following table presents the components of our deferred tax assets and liabilities (in thousands):
|
| | | | | | | |
| December 31, |
| 2016 | | 2015 |
Deferred Tax Assets | | | |
Net operating loss carryforwards | 31,949 |
| | 29,880 |
|
Deferred income and reserves | 341 |
| | 276 |
|
Depreciation of fixed assets | 1,169 |
| | (1,139 | ) |
Amortization of intangibles | 2,632 |
| | 2,654 |
|
Share-based compensation expense | 17,642 |
| | 15,090 |
|
Differences related to stock basis in equity investment | 377 |
| | 378 |
|
Other | 4,358 |
| | 2,027 |
|
Gross deferred tax assets | 58,468 |
| | 49,166 |
|
Valuation allowance | (57,346 | ) | | (48,044 | ) |
Deferred tax assets, net of valuation allowance | 1,122 |
| | 1,122 |
|
Deferred Tax Liabilities | | | |
Acquired intangible assets | (25 | ) | | (25 | ) |
Amortization of intangible assets | (1,840 | ) | | (1,116 | ) |
Foreign exchange gain/loss | (6 | ) | | (6 | ) |
Gross deferred tax liabilities | (1,871 | ) | | (1,147 | ) |
Net deferred tax liability | $ | (749 | ) | | $ | (25 | ) |
The following table presents the changes in the deferred tax asset valuation allowance during the years ended December 31st:
|
| | | | | | | |
| 2016 | | 2015 |
Balance at beginning of period | $ | 48,044 |
| | $ | 35,959 |
|
Increase related to net operating loss and cost and expense: | | | |
Incurred during the current year | 8,772 |
| | 12,301 |
|
Change related to prior-year true-ups | 549 |
| | — |
|
Effect of foreign exchange rate differences | (19 | ) | | (216 | ) |
Balance at end of period | $ | 57,346 |
| | $ | 48,044 |
|
Net operating losses available at December 31, 2016 to offset future taxable income in the U.S. federal, U.S. state, Hong Kong and China jurisdictions are $86.4 million, $31.7 million, $1.7 million and $3.9 million, respectively. The income tax rates in Hong Kong and China are 16.5% and 25%, respectively.
The U.S. net operating losses begin to expire in 2019. The net operating losses generated in Hong Kong have no expiration date and carry forward indefinitely, while the net operating losses generated in China have a five-year carryover period.
Under the Internal Revenue Code of 1986, as amended (the “Code”), if an ownership change (as defined for income tax purposes) occurs, §382 of the Code imposes an annual limitation on the amount of a corporation's taxable income that can be offset by net operating loss carryforwards. During our 2014 tax year, we analyzed recent acquisitions and ownership changes and determined that certain of such transactions qualified as an ownership changes under §382. As a result, we will likely not be able to use $18.6 million of our net operating loss carryforwards.
Because we permanently reinvest our earnings from foreign subsidiaries in such foreign subsidiaries to fund ongoing operations and growth, we have not provided for U.S. income tax or foreign withholding tax on the undistributed earnings of our foreign subsidiaries.
We evaluated our deferred tax assets to determine if any portion of those assets would not be realized in a future period. Based on our analysis of all available evidence, which included consideration of our history of generating consolidated pre-tax losses, we concluded that it is more likely than not that we will be unable to realize all of our net deferred tax assets and, as a result, we recorded a valuation allowance completely offsetting the net deferred tax assets.
For the years ended December 31, 2016 and 2015, we had no unrecognized tax benefits, and we have not taken any tax positions which we expect might significantly change unrecognized tax benefits during the 12 months following December 31, 2016.
We file income tax returns in various domestic and foreign tax jurisdictions with varying statutes of limitations. Our 2013 through 2016 tax years generally remain subject to examination by federal and most state tax authorities. In significant foreign jurisdictions, our 2013 through 2016 tax years generally remain subject to examination by the relevant tax authorities.